Over half of small business fail within 5 years, and over80% of these failures are due to cashflow problems. That’s around 40% - and that’s worrying because it isn’t difficult to do.
A cashflow forecast is a simple document or spreadsheet that provides an estimate of cash flowing into and out of your business during a certain time period – normally 3 or 12 months. It provides an at-a-glance assessment of future cash positions which can be a great help when planning major business decisions.
The biggest advantage of a cashflow statement is clarity. It gives you a glimpse into the future and a look at what your business might look like in 12 months time. With that knowledge, you can make decisions now.
If it looks like you might have excess cash in a few months, you may want to look at options for investing the cash and making it work for you. Alternatively, if it looks like you may be running short on cash in 6months, you can give yourself the time in advance to look at the best funding options available for you. What’s more, lenders will want to take a look at your cashflow forecast to ensure you’ve got the capacity to repay the loan –you’ve already done the hard work they’ll need, so minimal additional time needs investing to get the funding.
A further example of cashflow forecasting is scenario planning. What does your company cash position look like if you were to hire anew employee in 1 month, but they only start generating income in 4? What if you’re running out of capacity in your current premises and need to upgrade? With a cashflow forecast, you can quickly and easily adjust figures to account for these scenarios. This is powerful knowledge to have when running your business.
Whilst there are hardly any disadvantages to cashflow forecasting, it’s worth noting it is only a projection. It cannot predict the future with absolute certainty, however it does give you a much better idea than not having one at all. Even just the process of considering the cash inflows and outflows of your business and writing them down is worth it in the long run.
Overall, a cashflow forecast is a hugely powerful tool, and opens up many opportunities for planning – for the good or the bad. As we come out of the COVID-19 pandemic, enhancing your cash position into the future will help your company bounce back more effectively.